What’s Driving Growth for MLP Distributions?

Master limited partnerships (MLPs) historically have generated multiple benefits to investors including attractive yields, solid total returns and diversification from traditional asset classes.

New York-based Yorkville Capital Management gives some interesting insights into the value of the partnerships’ distribution increases in a recent study.

Yorkville points to three elements in MLPs’ total return: current income, growth of income and price appreciation.

Distributions influence all three factors, and provide several primary benefits, according to the report: (1) a hedge against inflation — preserving the purchasing power of the investment; (2) protection against rising interest rates — capital preservation; and (3) powers price appreciation — growing income streams increase the principal value of the investment.”

Looking at its universe of listed MLPs, Yorkville identifies and ranks the partnerships that showed the “highest quality distribution growth” from first quarter of 2008 through the fourth quarter of 2013.

The highest ranked securities became the components of the Yorkville Distribution Growth Leaders Index (YGMLP, YGMLPX).

The component MLPs are equally weighted in the index, and Yorkville will review the list quarterly and adjust it as needed on a regular basis.

Large and mid-cap partnerships represented 90% of the index as of the late 2013, and infrastructure MLPs accounted for 65% of it.

Growth Case

Yorkville compared the performance of the distribution-growth leaders with its overall MLP index.

The results of the study make a strong case for using distribution growth when evaluating a partnership’s investment potential.

When asked how financial advisors should use the information, Darren Schuringa, managing partner at Yorkville Capital, said: “The takeaway for advisors is that distribution growth represents the most productive way to evaluate the MLP asset class and underpins the investment thesis for MLP investing.

“MLP Distribution Growth Leaders provide more reliable income than the broad MLP universe, while growing income streams preserve purchasing power by serving as a hedge against inflation and protection against rising interest rates,” Schuringa added. “Growth MLPs offer optimal fundamental total return exposure to MLPs.”

(The report, “Yorkville MLP Distribution Growth Leaders Index: A Complete Study of Fundamentals, Returns, Risk, and Correlations,” is available online.)